Is Loyalty Dead?

In his book The Loyalty Effect, Fred Reichheld notes that on average, U.S. corporations lose half their customers in five years and half their employees in four. On top of this, he shows that disloyalty at current rates has been shown to stunt corporate performance by 25 to 50 percent. That's incredible! For any company looking for long-term growth and stability, such defection rates are simply unsustainable.

Creating loyalty, then, from customers and employees is obviously critical. Unfortunately, you simply can't have loyalty from one without the other. Losing employees becomes a vicious cycle which can cause customer disloyalty, while losing customers can cause high turnover in employees. Consider Reichheld's simple illustration concerning the tangible benefits of maintaining loyalty:

Imagine two companies, one with a customer retention rate of 95 percent, the other with a rate of 90 percent. The leak in the first firm's customer bucket is 5 percent per year, and the second firm's leak is twice as large, 10 percent per year. If both companies acquire new customers at the rate of 10 percent per year, the first will have a 5 percent net growth in customer inventory per year, while the other will have none. Over fourteen years, the first firm will double in size, but the second will have no real growth at all. Other things being equal, a 5-percentage-point advantage in customer retention translates into a growth advantage equal to a doubling of customer inventory every fourteen years. An advantage of ten percentage points accelerates the doubling to seven years.

Besides these considerations, what else about maintaining loyalty makes it so lucrative? Two things come to mind immediately. First, most businesses rely on customer referrals for continued success. In fact, it's hard to imagine a business grow when there's widespread consumer discontent with its service and offerings. Fortunately or unfortunately, the opinion of consumers can circulate in this day and age within a few seconds to literally millions of other prospects. But the real value of maintaining customer loyalty is that you always have a ready and willing pool of customer advocates for your products and services: and there isn't anything more powerful than having your customers do your selling for you!

Second, there's a natural relationship between employee loyalty and customer loyalty that's often not fully appreciated. Stability within a company is tied to employee retention. Loyal employees provide a maturity and expertise that's incredibly difficult to maintain with high turnover. We've all tried to get help from employees that clearly don't have the history required to solve our problem. Everyone knows how frustrating this can be, and how it creates an overall negative perception of the company.

But the flip side to this is that companies that tend to have high customer retention also tend to have high employee retention. At least one reason for this phenomenon is that employees seem to feel their job has more meaning when the company can generate such enthusiastic customers, which in turn bolsters employee morale. It's a circle often overlooked. And importantly, this cycle leads to higher productivity. As reported by Conley, the Gallup Organization found that a highly engaged employee and customer leads to 3.4 times more financial productivity. Impressive.

The moral? Loyalty is only dead for companies that foolishly think that success is maintained without such a focus. Creating an environment that inspires loyalty isn't easy, but critically important, and in the end the surest way to guarantee financial success and long-term growth.

Customer Service, The Ritz Carlton Way

If businesses treated people the way the Ritz does, the world would be a better place.  Being in the hotel business, you’d expect the service to be good, but the Ritz literally puts other hotels to shame.  They’ve set the bar on service excellence that every business should do their best to imitate.  While it would take a book like Joseph Michelli’s The New Gold Standard to do it justice, a few things about the Ritz deserve attention, which will help illuminate a recent experience we had at the Marina Del Ray location.

Summed up nicely on a card which all employees carry is the Ritz Credo, which states their pledge to provide the finest personal experience which enlivens the senses, instills well-being, and fulfills even the unexpressed wishes and needs of guests.  Michelli notes it’s all a result of their belief that guests should be treated like family.  The intimacy of interpersonal caring and the art of anticipation are critical aspects of the Ritz culture; they’re the secret sauce of the Ritz Mystique.  In fact, to guarantee their ideals are carried out by employees, the company empowers every single one to spend up to $2,000 on each guest each day.  And that’s all without seeking permission from a supervisor.  Talk about trusting your employees!

Though I think we should aim for service excellence for its own sake, there’s an interesting side effect that Michelli reports.  Ritz research shows that a guest who’s actively engaged with the Ritz and its staff spends a whopping 23 percent more money than the one who’s only moderately engaged.  When employees produce a 4-percentage-point increase overall in customer engagement scores, the Ritz achieves an extra $40 million in revenue!  That’s incredible, and I suspect it’s true to some extent for most businesses.

A Vacation to Remember

None of the hype about the Ritz Carlton is mere theory, as we recently found out during our stay at the Ritz in Marina Del Rey (consistent with our memorable Ritz experience in Maui last year).  Wowing us began after we checked in and realized our bathroom door wouldn’t lock (something you like to do when toddlers are present).  It only took a few minutes for maintenance to show up, but he realized he didn’t have the correct part.  It only took another minute or so, but when he returned he surprised us by bringing the new movie Wreck-It Ralph for our boys, anticipating the fact that we’d need kiddo distraction during our stay.  Great way to foresee a need we couldn’t even verbalize at the time.

But it only got better.  The next morning as we walked off the lobby elevator, Gloria greeted us with a warm smile and proceeded to make animal balloons for our twin boys (which they loved!).  Treating us like we were family, she made sure she memorized our names and even took the time to write down the spelling of our boys’ names.  When we returned to our room, there were two gift baskets for our tots complete with an engraved Ritz name badge (names were spelled correctly by the way, which isn’t easy), beach balls, and a fully wrapped gift for each.  I mean you would have thought it was Christmas at home, presentation and all.  Every little detail was perfect.

Pretty cool.  They made us feel like we were at home with family, yet with all the sophistication of the Ritz.  And that resonated deeply with us because as we have toddlers (plural), we were apprehensive that the staff might be put out with their energy.  Far from it, we were never made to feel as though the hotel catered only to adults.  In fact, they had something for the kids, whether a movie, a sucker, or a car every day of our stay.  And they always genuinely greeted us with warmth.

One other thing that wowed me was a day at the pool.  We’d apparently left a drink behind.  The following day, Chris (the pool attendant) said he noticed we’d left it there and insisted on replacing it with a drink of our choice.  May be small, but it left a big impression.  Even when we checked out and I brought the car to pick up luggage, our Bellman made sure I could find the rental car facility, warmly shook my hand, and offered me a bottle of water for the road.

All this got me thinking about the impact the staff made on us that week.  There are a lot of nice hotels, but none of them are the Ritz.  Their warmth and thoughtfulness made our trip.  It’s true that Ritz ambience is beautiful, but the service they provided our family that week completely overshadowed the amazing surroundings.  Makes me scratch my head when companies have the same opportunities the Ritz does with customers, yet fail to understand that making an emotional connection is king.  There’s simply no substitute.  Not only did we love our stay, but because of their generosity we made it a point to purchase gifts at their shop instead of the Promenade shopping area in Santa Monica, which is much larger.  So it’s true, warmth and generosity do pay off after all.  Oh, and there’s also the fact that a guest (me) has taken the time to write about it, which is free to them, and delivered that word of mouth advertising every company craves.  Guess I can only hope other businesses will follow the Ritz’ lead, but I won’t hold my breath.

Negotiate Great Relationships - Concluding Thoughts

Experts love to paraphrase the Italian diplomat Daniele Vare that negotiation is the art of letting them have your way.  While that might sound a bit crafty, there’s a lot of truth to it.  But in most deals there are multiple people involved from each side that all have their own interests they’re looking to have met.  So it’s often difficult to see just how you can let them have your way.  Where to begin with so many interests involved?  We’ve seen this dynamic in almost every negotiation we’ve been involved in, and it can be both frustrating and challenging.

Harvard Professor James Sebenius makes a useful observation here, and one that can save you a lot of grief; that what’s rational for the whole may not be for the parts.  To assess the full set of interests at stake, you have to understand the interests of all the key players in the internal decision process.  In the thick of things it’s easy to focus on the one who speaks the most.  But in virtually every case, there’s an entire subset of often conflicting interests in the background threatening to derail an agreement.

We’ve learned through trial and error that the detractors need direct attention.  Underneath the hostility lies a set of interests that have to be met for agreement to move forward.  And one thing we’ve had to learn is that their real interests are often masked, so digging further down is essential.  Offering empathy for their concerns and asking tons of questions seems to work the best:  Why is it you want that, What exactly are you trying to accomplish, What’s the end goal?  We’ve found this helpful because people have the tendency to get caught up in solving their problem in a particular way, which makes it our job to show how it could be solved in perhaps a better way.  Tunnel vision is human nature, it exists in every discipline, but in negotiations it has to be addressed. 

Professor Sebenius adds along these lines that since agreement represents the simultaneous solution of all sides’ problems, solving their problem is part of solving your problem.  His advice?  And I wish I’d read this years ago, avoid the self-defeating mistake of letting them solve their problem while we solve ours.  Huge mistake.  Almost guaranteed that if you disengage their resistance hardens.  What he says couldn’t be any more accurate.  Stay close to each participant, develop good relationships as much as possible, and incorporate their feedback in the process.

In the end, it’s all about creating long-term relationships, so approach negotiation, and renegotiation, with the attitude of genuinely trying to satisfy each party’s interests.  If you succeed, the financial and psychological benefits are enormous.  Because after it’s all said and done, all any of us have are our relationships, and those can’t be reduced to financial statements or spreadsheets. 

Negotiate Great Relationships - Part 2

In our second blog on negotiating tips, I'll summarize the advice of expert William Ury that I wish I’d read years ago.

Ury lays out five tips that can save you a lot of grief if used wisely. 

1.  Go to the Balcony, not to be confused with The Godfather’s “Go to the Mattresses.”  While it sounds as obscure, it’s helpful.  He’s pointing out the danger of our tendency to react when attacked.  Simply put, don’t try to control the other person’s behavior, control your own.  “Go to the balcony” means that you buy some time to refocus on the end goal, an apt image for getting perspective on the situation and picturing yourself standing on a balcony looking down on the negotiation.  Useful advice, because to engage in joint problem-solving you need to maintain your mental balance and stay focused on achieving what you want. 

2.  Step to Their Side.  When engaged in talks it’s easy for things to go awry.  Emotions get involved and viewpoints can seem almost unmanageable.  You need to create a favorable climate and defuse anger, fear, hostility, and suspicion.  If they attack, they expect you to do the same - so do the opposite.  Listen to them, acknowledge their points, and agree with them whenever you can.  Acknowledge their authority and competence.  But arguing with them won’t help, in fact it will make them more abrasive.  Step to their side.  Look for occasions when you can say yes to them without making concessions.  Here’s where subtlety and human warmth is called for, something that can’t be calculated on any spreadsheet.

Harvard Professor James Sebenius makes an important point here.  Developing and maintaining a strong social contract (I’ll simply call this relationships) can be as, or even more important, than a good economic contract.  This is one point we’ve found to be especially true in our business.  Negotiating the spirit of a deal shouldn’t be less important than the letter contained in spreadsheets.  Successful ventures generally work through problems on the basis of good relationships; when people run to check contracts it usually spells trouble.  As powerful evidence of this, Sebenius quotes Felix Rohatyn, former managing partner of Lazard Freres, that “most deals are fifty percent emotion and fifty percent economics.”  Relationships can be instrumental in making or breaking a deal.

3.  Reframe.  Simply rejecting the other side’s position makes them dig in further.  Instead, when they take a hard-line position, change the game, reframe; meaning, direct their attention to the challenge of meeting the interests of each side.  Reframe what they say to direct them back to the problem by asking problem-solving questions such as, Why is it that you want that? or What if we were to...?  In other words, let the problem be the teacher.  Keep in mind that successful negotiators ask countless questions.

4.  Build them a golden bridge.  People want to look good, they want to appear as though they’ve won.  So help them by crafting an agreement that makes it look like they won.  Fact is, everybody needs to win for the agreement to be long-term anyway.  As we noted earlier, negotiation is a social process in which various parties have to participate in order for an agreement to be crafted.  The process is as important as the result, and as people participate - even those initially hostile - they make the process their own. 

We’ve noticed this in our negotiations, especially when there’s initial resistance to agreement.  Once those people are engaged and infuse their ideas into the process, they change their tone to one of ownership and vested interest in the final outcome.  In short, you have the opportunity to take people from obstructions to advocates for a negotiated agreement.

Ury says that you should think of yourself as a mediator whose job it is to make it easy for them to say yes.  Involve them in the process, incorporate their ideas.  Try to identify and satisfy their unmet interests, particularly their basic human needs.    Don’t push, build them a golden bridge.  Especially helpful, show the other side how your proposal stems from or relates to one of their ideas.  This is something we try to use whenever possible, as it gives the clear signal that we’re interested in the relationship as much as the signing of a document.  People want to feel they’re being heard (on all levels) and that what they say matters.  Demonstrate tangibly that it does.

5.  Use power to educate.  After everything you do, resistance is still possible.  If so, and if they think they can win without your cooperation you need to educate them to the contrary.  You need to make it hard for them to say no to an agreement.  Instead of threats, educate them about the costs of not agreeing.  Ask reality-testing questions, demonstrate your BATNA and reduce the lure of theirs.  Use only if necessary, and minimize their resistance by exercising restraint and reassuring them that your goal is mutual success, not victory.  Don’t escalate, use power to educate.

Concluding thoughts to come next week, stay tuned...

Negotiate Great Relationships

Relationships are one of those basic facts of life, and for most, an appreciated fact.  They’re formed for various reasons, but at the heart it’s because we depend on one another for certain results, which could be anything from unity, security, love, or even financial gain.  But because relationships are one of those basics in life, so is negotiation; and while it’s easy to think of negotiating as something only Fortune 500 companies do, it’s actually as much a fact of life as relationships themselves.  It comes into play every time people who depend on one another for results have different perceptions of a situation or have differing interests.  And since we all depend on one another, and since we don’t often see everything the same way, we’re all constantly involved in negotiation - be it in our marriages, friendships, work relationships, or board room level deliberations.

The reason I’m highlighting negotiation in this three part blog is because relationships make the business world go round, and negotiation (and renegotiation) plays a crucial role in making those relationships strong and sustainable.  Negotiating can, and will, either set a relationship up for long-term success or doom it to failure, and it needs to be viewed as a foundation of business itself.  So I thought I’d pass along some helpful tips from the experts, as well as some we’ve learned along the way.

The Real Point of Negotiation

Put simply, negotiation is a means of furthering interests by joint problem-solving.  Sounds easy, but this is an easy one to side-step.  Often, true interests aren’t stated at all, as we’ve discovered in our business on many occasions.  Agreement in those situations wasn’t reached for some time because it took considerable digging to find out what the real interests were for all the key players. 

So it’s wise to listen attentively to what they’re actually trying to accomplish, as it’s often not what’s stated in their objectives.  In one our negotiations, the stated objectives focused on replacing their current offering feature for feature, but it turns out that the underlying motivation for seeking a replacement was to sign an agreement with someone they could call a partner.  Someone that would actually listen to and implement their feedback in future product development.

Makes complete sense, we all want to be heard - and it’s why William Ury points out that the single most important skill in negotiation is the ability to put yourself in the other side’s shoes.  If your aim is to change their thinking, you have to begin by understanding what their thinking is with some degree of empathy.  Effective negotiators listen far more than they talk. 

Harvard Professor James Sebenius adds that to influence their decision most effectively you need to understand their problem as they see it.  What counts is their perception of their real interests, not what you think their interests should be, but theirs as they see them, their perceptions of their alternatives to an agreement (their BATNA, or Best Alternative To a Negotiated Agreement), their notions of fairness, their constituency pressures, etc.  When I think how many times we’ve failed at this and how we could have been spared heartache by following his advice... well, I’m sure you can understand.  It’s all too easy, in fact it’s human nature, to get caught up in seeing things through the narrow prism of our own objectives. 

At least part of the reason we’re prone to this is because we tend to think their interests are the opposite of ours.  Psychologists who’ve studied this call it the “mythical fixed pie,” which implies that the pie is fixed and that it’s a win-lose game in which any gains to one side are offset by losses on the other.  In fact, Professor Sebenius adds that in one study of over 5000 subjects in 32 negotiation studies, participants failed to realize compatible issues a whopping 50% of the time.  His advice?  Don’t deduce their intentions from your fears.

More great tips to come next week....

Striking That Delicate Balance: Pessimism and Optimism

“It is always easy to let the age have its head; the difficult thing is to keep one’s own.”  G. K. Chesterton, 1908.

These are turbulent times, and there are a lot of unknowns causing anxiety on a number of fronts, from sweeping changes in buyer behavior to how government policies will affect the bottom line.  Organizations across the board are considering various ideas in hopes of striking that delicate balance that will provide the basis of financial and cultural health.  But keeping one’s head in the sea of those ideas has become the order of the day to stay competitive.

“All achievements,” writes American author Napoleon Hill, “all earned riches, have their beginning in an idea.”  It’s true, as study after study has demonstrated, that it’s the ideas and ideals that drive one company to success and another to ruins.  The key has always been in harnessing those ideas in a delicate balance that doesn’t allow one to become more, or less, powerful than the other.  That’s because each idea, in isolation from the others, is strong enough to cause damage to a company and place it at risk.  Two of those are especially interesting and have become almost cliches of popular culture, but are extremely important to the health and well-being of any company:  namely, the ideas of pessimism and optimism. 

How many times have you been asked if you’re a person who views the glass as half full or half empty (as if that’s your only choice)?  I suppose in popular life such a simple view of things suffices, but if your financial health and security hinges on the correct answer (as it actually does for every company), then perhaps a more nuanced approach is warranted.  What I propose is that the popular answer, that you’re simply one or the other, is faulty;  and more, that any company wanting to flourish has to think about this more expansively.

One thing we certainly wouldn’t want is a compromise between optimism and pessimism, as we wouldn’t want joy and anger for example to neutralize each other and produce an unpleasant contentment.  Being a mixture of two things, it would be a dilution of the two, with neither present in its full strength or contributing its full color.  What we should desire, rather, is a fiercer delight and a fiercer discontent.  We want the two side by side in all their ferocity and at the top of their energy.  The enemy is an amalgam or compromise of the two.  So the question for us is, can we be at once not only a pessimist and an optimist, but a fanatical pessimist and a fanatical optimist?

As Chesterton pointed out long ago, both of these ideas need to be free to roam because both are kept in their place.  The optimist can pour out all the praise he likes on the triumphant music of the march, the golden trumpets, and the purple banner going into battle.  But he must not call the fight needless.  The pessimist might draw the picture as darkly as he chooses concerning the wounds of battle.  But he must not call the fight hopeless.  The point I’m trying to make is that both are necessary to the health and sanity of an organization.  The optimists and the pessimists are not quite right enough individually to run the organization:  the former tending to gloss over the brutal facts with the latter tending to call the fight hopeless.  Having both coexist in all of their energy keeps black from evolving into white to form a dirty gray, which produces mediocrity and everything the sane person deplores.

And interestingly, this is exactly the proposal we find in Jim Collins’ bestselling business book, Good To Great.  Those visionary companies he investigates that vastly outpaced their competitors had just this ability to hold the two ideas side by side.  Under the appropriately named section “Facts are Better than Dreams,” Collins says that these companies displayed a distinctive form of disciplined thought as they infused all of their processes with the “brutal facts of reality.”  They institutionalized a careful look at the reality they faced vis-a-vis competitors, customers, market trends, etc.  In fact, in his latest book Great By Choice, he elaborates further and notes that these companies have what he calls a “productive paranoia.”  He’s worth quoting here:

“Fear should guide you, but it should be latent,” [Bill] Gates said in 1994.  “I consider failure on a regular basis.”  He hung a photograph of Henry Ford in his office, to remind himself that even the greatest entrepreneurial successes can be passed by, as Ford had been passed by GM in the early history of the auto industry.  He worried constantly about who might be the next Bill Gates, some freaky high school kid toiling away 22 hours a day in some dingy little office coming up with a lethal torpedo to fire at Microsoft.


In all of the visionary companies Collins examines, pessimism is not only allowed, but encouraged to run wild, as long as it’s kept within limits and held next to an “unwavering faith amid the brutal facts.”  In other words, an unbridled optimism was absolutely necessary as well.  A faith that no matter what, the company would make it through, and make it through brilliantly.

Insightfully, Collins sums this up by referring to Admiral Jim Stockdale, who was the highest ranking U. S. military officer in the “Hanoi Hilton” prisoner-of-war camp during the height of the Vietnam War.  Tortured over twenty times during his eight-year imprisonment, Stockdale lived out the war without any prisoner’s rights, no set release date, and uncertain whether he’d ever see his family again.  Collins’ interview with Stockdale is impactful and important:

   “I never lost faith in the end of the story,” he [Stockdale] said, when I asked him.  “I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade.”
   I didn’t say anything for many minutes, and we continued the slow walk toward the faculty club, Stockdale limping and arc-swinging his stiff leg that had never fully recovered from repeated torture.  Finally, after about a hundred meters of silence, I asked, “Who didn’t make it out?”
   “Oh, that’s easy,” he said.  “The optimists.”
   “The optimists?  I don’t understand,” I said, now completely confused, given what he’d said a hundred meters earlier.
   “The optimists.  Oh, they were the ones who said, ‘We’re going to be out by Christmas.’  And Christmas would come, and Christmas would go.  Then they’d say, ‘We’re going to be out by Easter.’  And Easter would come, and Easter would go.  And then Thanksgiving, and then it would be Christmas again.  And they died of a broken heart.”
   Another long pause, and more walking.  Then he turned to me and said, “This is a very important lesson.  You must never confuse faith that you will prevail in the end - which you can never afford to lose - with the discipline to confront the most brutal facts of your current reality, whatever they might be.”

...The good-to-great leaders were able to strip away so much noise and clutter and just focus on the few things that would have the greatest impact.  They were able to do so in large part because they operated from both sides of the Stockdale Paradox [understanding the brutal reality and having an unwavering faith that they’ll prevail], never letting one side overshadow the other.

                                 
And so must we.

The Power of Experience

Did you know that the effectiveness of our communication with others isn't primarily related to the words we choose? In fact, of the total effectiveness of communication, our word choice stands at a mere 7%, while our tone ranks at impressive 38%. So what takes up the remaining 55%? Body language.

Research is showing that much of what companies have assumed about their customer interactions are false. As the findings above seem counterintuitive, so are recent findings about how customers form judgements about products and services, and the companies that offer them. Consider, as just one example, how just these findings should impact the procedures and behaviors of companies that run call centers. If body language constitutes such a huge portion of communication, something that isn't even present in these interactions, then think about how important tone becomes for each and every call.

But there's a substantial amount of research suggesting that a customer's emotions play a pivotal role in the thinking process itself. So important is this role that customers are unlikely to even store for later recall products that are presented to them that aren't tagged with emotional significance. What's interesting about this is that companies have underrated how complex their customers are, in the sense that at every moment we all pick up on clues at both a conscious and unconscious level that form our judgments about products and companies.

Thus, businesses need to take special note of how their interactions and products make their customers feel, because one way or another, they're impacting their experiences in a positive or negative manner. Companies can better harness research findings to create customers that not only speak, but evangelize, on their behalf. It's the emotional connection they make with customers that businesses need to embrace and implement at every level of the organization. Such connection will create higher profits to be sure, but equally important, customers who reach what Chip Conley calls “peak experiences” with the products and services. There's simply no substitute in today's business environment for energized customers who do your marketing for you.

To read more, use the following link for a detailed white paper:   http://www.compusoftdevelopment.com/download-files/Customer%20Experience%20White%20Paper.pdf